In this blog, CReAM Researchers and CReAM Fellows comment on recent events and on the current political debate. Below each article you can add comments.

Thursday, 8 October 2015

Fact Check: is there zero economic benefit from high immigration?

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

The evidence – from the OECD,
the House
of Lords Economic Affairs Committee and many academics – shows that
while there are benefits of selective and controlled immigration, at best the
net economic and fiscal effect of high immigration is close to zero. So there
is no case, in the national interest, for immigration of the scale we have
experienced over the last decade.

Evaluating the home
secretary’s claim requires recognising that the economic effects of immigration
have several dimensions. Although she says the overall impact is close to zero,
she bases that on several specific claims.

The first point of
concern is how immigration affects the labour market. It is easy to tell anecdotes about
how immigration harms job prospects in receiving countries – but this can be
misleading. Immigrants compete with similarly skilled workers but they also
create demand for jobs by spending their income. Just like other forms of
population growth, economies absorb immigration in many ways: importing
capital, adjusting the composition of goods produced, adjusting training and
technology.

The effect on wages
has been heavily researched in
many countries and evidence of large effects has indeed been difficult to find.
There are exceptions,
but the predominant conclusion is that immigration does not harm wages or
employment.

Elsewhere in her
speech, May contests this. She admits that migration can help “plug skills
shortages” and bring talent in but makes specific negative claims about low
wages and employment. She says that “we know that for people in low-paid jobs,
wages are forced down even further while some people are forced out of work
altogether”. More strongly, she argues that “there are thousands of people who
have been forced out of the labour market, still unable to find a job.”
Immigration control is needed: “For the sake of the people whose wages are cut,
and whose job security is reduced, when immigration is too high.”

What happens to wages

What we do know
about immigration
to the UK is that immigrants are, on the whole, well-qualified but
nevertheless tend to work initially in less well-paid jobs. There is some
evidence from comparisons across regions that wage changes and
immigration are most strongly associated in those jobs where immigrants work in
the early years after arrival.

This could provide
some justification for claims about wages – but it is subject to caveats. The
effects are very small and immigrants move up to higher paying jobs the longer
they stay so it is likely that such effects will disappear over time.
Furthermore, there are counterbalancing wage gains in parts of the labour
market where immigrants are not found and these more than compensate overall.
On average, if wages gain from immigration then it ought to be possible to
compensate those who lose and to
benefit collectively.

As regards effects
on employment, no convincing evidence exists to support the claim that
immigration depresses it. Several studies have failed
to find an effect.
Work from within the government’s Migration Advisory Committee found
evidence of association between one sort of migration in one period
and changes in employment but the report in question is itself careful to point
out that it is not
very robust.

So overall, it’s
possible to argue that the effect on the labour market of high immigration is
small but not to support some of the other claims made about the labour market.

Positive effect on public finances

A second aspect of
economic effect is the effect on the public sector. What we know here is that
in the ten years since 2001 the best evidence, trying to account
comprehensively for effects through all taxes and all components of public
spending, is that migration impacted
public finances positively, particularly migration from within the EU but
also from outside. This was at a time of overall fiscal deficit when the
average British-born person was contributing negatively, as the graph below
shows.

Whether this effect
is “close to zero” or not depends what it is being compared to. As a fraction
of the overall deficit over the period it is small but on a per-immigrant basis
it is more impressive. This is just the short term impact and a fuller
assessment would need to look to the long-term when young, healthy,
working immigrants will age, some possibly return to places of origin, and some
bring up children whose taxes will contribute.

The home secretary
also mentioned effects on specific services, claiming that:

when immigration is too high, when the pace of change is too fast, it’s
impossible to build a cohesive society. It’s difficult for schools and
hospitals and core infrastructure like housing and transport to cope.

The home secretary
finished her speech by concluding that “there is no case, in the national
interest” for large scale immigration. A full evaluation of this claim would
need to take account of other aspects to the economic impact about which
evidence is thinner. The economic case is not based so much on the scale of
migration as perhaps on limiting migration restrictions which prevent firms
from searching widely for skills and workers moving to where there are jobs. There
is some suggestive and plausible evidence, largely from outside the UK, that
immigration promotes innovation,
entrepreneurialism and trade in
ways that will boosts growth.

Verdict

It is true that the
labour market impacts of immigration on British-born workers are plausibly
close to zero – but that contradicts claims made elsewhere in the home
secretary’s speech. Fiscal effects, on the other hand, at least in the short
term, are not close to zero but positive. A full assessment of economic
arguments for immigration would have to go beyond these effects.